Passive Funds Outshine Actively Managed Ones: 3 Winners

August marked one of the biggest milestones in the investment community. For the first time in history, total assets in America’s index-based equity mutual funds and ETFs surpassed that of active stock funds. While, passive investing has been gaining prominence in recent past, a shift of such nature is only expected to gather steam in the days to come.

Investors grew an appetite for low-cost passive funds after the last financial crisis. This migration was further fueled by cheaper fees. To put that into perspective, passive equity funds in the United States cost only about $0.10 a year per $100 of assets compared with $0.70 a year for the actively managed ones.

Further, market watchers also view this as an inevitable end to money managers’ influence on the stock markets. Meanwhile, per estimates from Morningstar, fund inflows in index funds boosted the assets to $4.271 trillion. In comparison, assets held by active funds totaled $4.246. In the year-to-date period through August, a total of $88.9 billion has been invested in passive equity funds, withdrawing $124.1 billion from the active funds.

Why Buy Index Funds?

An index fund is a type of mutual fund that is designed to replicate a specific market index. The portfolio is constructed in a manner that the fund may track or match the components of the index. The fund aims to imitate the performance of the index through its investment strategy.

Since an index fund typically owns all the securities in a given index, maintaining the fund requires lesser effort. This makes these funds have lower fees than those that are actively managed.

Investing in an index fund can be deemed as a type of passive investment, which ensures that the fund outperforms the majority of actively managed mutual funds. The fund’s investment strategy can be termed passive because it owns a fixed portion of all the equities that comprise a given index in a bid to imitate its performance.

3 Best Picks

We have, therefore, selected three index funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging year-to-date return. Additionally, the minimum initial investment is within $5,000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Invesco Equally-Weighted S&P 500 Fund Class A VADAX aims for total return through capital appreciation and current income. The fund invests in a portfolio comprising common stocks that form the S&P 500 Index. The fund usually invests in these stocks in the S&P 500 in a manner that it maintains an equal weighting of each stock. The fund carries a Zacks Mutual Fund Rank #1.

This Zacks sector – Index product has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VADAX has an annual expense ratio of 0.53%, which is below the category average of 0.95%. The fund has returned 16.1% on a year-to-date basis.

Fidelity Series Small Cap Discovery Fund FJACX aims for capital appreciation over a long period. The fund primarily invests in common stocks. FJACX invests the majority of its assets in securities of small-capitalization companies. These companies usually have market capitalization similar to companies on the Russell 2000 Index or the S&P SmallCap 600 Index. The fund carries a Zacks Mutual Fund Rank #1.

This Zacks sector – Index product has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FJACX has an annual expense ratio of 0.00%, which is below the category average of 1.14%. The fund has returned 16.8% on a year-to-date basis.

Russell Investments U.S. Strategic Equity Fund Class S RSESX aims to provide capital appreciation over a long period. The fund invests the majority of its assets in equity securities of American companies. These are mostly common stocks of medium- and large-capitalization companies. These companies usually have market capitalization similar to those included on the Russell 1000 Index. The fund carries a Zacks Mutual Fund Rank #2.

This Zacks sector – Index product has a history of positive total returns for more than 10 years. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

RSESX has an annual expense ratio of 0.74%, which is below the category average of 0.95%. The fund has returned 18.6% on a year-to-date basis.

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